Coach 2006 Annual Report Download - page 25

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires an employer to recognize the funded status
of a benefit plan, measured as the difference between plan assets at fair value and the projected benefit obligation, in its statement of
financial position. SFAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial position. This statement is effective as of the end of the fiscal year ended June 30, 2007,
except for the requirement to measure plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial
position, which is effective for the fiscal year ending June 27, 2009. The impact of adopting SFAS 158 is described in Note 12.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 states that SEC registrants should use both a balance
sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement, contains guidance on
correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. SAB 108 is effective
for annual financial statements covering the fiscal year ended June 30, 2007. The adoption of SAB 108 did not have an impact on the
Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an
amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other
items at fair value. This statement is effective for the fiscal year beginning June 29, 2008. The Company does not expect the adoption of
SFAS 159 to have a material impact on the Company’s consolidated financial statements.
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The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from
adverse changes in interest rates or foreign currency exchange rates. Coach manages these exposures through operating and financing
activities and, when appropriate, through the use of
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derivative financial instruments with respect to Coach Japan. The use of derivative financial instruments is in accordance with Coach’s
risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes.
The following quantitative disclosures are based on quoted market prices obtained through independent pricing sources for the same or
similar types of financial instruments, taking into consideration the underlying terms and maturities and theoretical pricing models. These
quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ
from those estimates.
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Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency
other than the entity’s functional currency, and from foreign-denominated revenues and expenses translated into U.S. dollars.
Substantially all of Coach’s fiscal 2007 non-licensed product needs were purchased from independent manufacturers in countries other
than the United States. These countries include China, India, Hungary, Indonesia, Italy, Korea, Mauritius, Singapore, Spain, Taiwan and
Turkey. Additionally, sales are made through international channels to third party distributors. Substantially all purchases and sales
involving international parties, excluding Coach Japan, are denominated in U.S. dollars and, therefore, are not subject to foreign currency
exchange risk.
In Japan, Coach is exposed to market risk from foreign currency exchange rate fluctuations as a result of Coach Japan’s U.S. dollar
denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily zero-cost collar options,
to manage these risks. The foreign currency contracts entered into by the Company have durations no greater than 12 months. As of June
30, 2007 and July 1, 2006, open foreign currency forward contracts designated as hedges with a notional amount of $111.1 million and
$114.8 million, respectively, were outstanding.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its
$231 million U.S. dollar denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach Japan
entered into a cross currency swap transaction, the terms of which include an exchange of a U.S. dollar fixed interest rate for a yen fixed
interest rate. The loan matures in 2010, at which point the swap requires an exchange of yen and U.S. dollar based principals.
The fair values of open foreign currency derivatives included in current assets at June 30, 2007 and July 1, 2006 were $23.3 million
and $2.6 million, respectively. The fair value of these contracts is sensitive to changes in yen exchange rates.
Coach believes that exposure to adverse changes in exchange rates associated with revenues and expenses of foreign operations, which
are denominated in Japanese Yen and Canadian Dollars, are not material to the Company’s consolidated financial statements.
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Coach is exposed to interest rate risk in relation to its investments, revolving credit facilities and long-term debt.
The Company’s investment portfolio is maintained in accordance with the Company’s investment policy, which identifies allowable
investments, specifies credit quality standards and limits the credit exposure of any single issuer. The primary objective of our investment
activities is the preservation of principal while maximizing interest income and minimizing risk. We do not hold any investments for trading